Credit card delinquencies have risen to levels not seen in years. This trend reflects both the rising amount of household debt and the increasing tendency of banks to lend excessive amounts (e.g., through very high spending limits on cards), despite a borrower’s apparent inability to repay same.
Delinquencies at JPMorgan Chase & Co, Bank of America and Discover Financial all rose almost 2 percent in each of the last several months. While modest, the steady rise in delinquencies has signaled a change in credit card lending practices and U.S. household debt.
Why would banks extend credit to “sub prime” (less than qualified) borrowers? Lending to subprime borrowers, whether through actual loans or credit cards, carries risks for both the bank and borrower. A “subprime borrower” is anyone whose debt obligations and income result in a lending risk for banks. Why would banks do this? The answer is simple economics. Because general interest rates are and have been at historic lows over the past several years, banks are looking to make up revenue lost to the low rates. This is done by making riskier loans and extending credit (i.e., credit card accounts) to less qualified borrowers, at higher interest rates. By expanding their pool of borrowers, lenders hope to make up the revenue they’re not getting from existing borrowers — the theory works if everyone pays. However, we all know it doesn’t quite work that way.
US household debt at all-time high
Earlier this year, US household debt rose to pre-2008 levels. The rise is fueled by increasing mortgage, auto, credit card and student loan debt. This means that despite currently low interest rates, many households are struggling with debt. Credit card debt makes up a large part of this overall debt burden. Once behind, the average consumer will be very hard pressed to keep up payments on thousands of dollars of debt, usually at very high interest rates — most times in excess of 20 percent.
Bankruptcy can be an option when credit cards become unmanageable
Fortunately, when it comes to credit cards or personal loans, relief for debtors is available. In a Chapter 7 bankruptcy, the debtor can usually eliminate most or all such debt, while keeping most assets. If a debtor has very high income and/or significant assets, relief may still be at hand in a Chapter 13 bankruptcy. In a Chapter 13 case, the debtor reorganizes debt into manageable payments. After several years, the debt is either paid off or the remaining debt is forgiven, depending upon the debtor’s personal financial situation.
Bankruptcy is not a sign of failure. It is a federal law available to help honest debtors obtain relief from their debts, while preserving their assets and stopping legal actions against them, such as aggressive bill collectors, wage garnishment, bank account seizures, foreclosures, and other lawsuits. However, bankruptcy laws are complex and confusing. Don’t attempt to do this on your own. What you don’t know can really hurt you. Let us help.
Your creditors are protecting their interests — are you?